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By Jani Ziedins | End of Day Analysis
Free After-Hours Update: Special Edition
I normally publish free blog posts on Tuesday and Thursday evenings, but Monday’s dramatic tumble warrants a special edition.
TL;DR: At the end.
The S&P 500 tumbled Monday in the second largest drop of the year, shedding 2.5% after Trump and China escalated their trade war to the next level. Last week Trump followed through on threats to increase tariffs to 25% and China retaliated this weekend with reciprocal tariffs. As bad as it sounds, stocks are still holding critical 2,800 support, even if just barely.
While dramatic, no one should have been surprised by Monday’s tumble. On May 2nd when prices were near all-time highs, I told readers to be mindful of a larger pullback to support;
“If prices tumble under 2,900 and finish near the day’s lows, that is a very bearish development and it means further selling is ahead of us. The most obvious next level of support is 2,850. After that, far more meaningful support is back at 2,800. While it would feel scary, either of these would be reasonable levels to test in a normal and routine pullback. Two steps forward, one step back.”
Here we are 11 days later and traders are running around like the world is ending. The thing to remember is these things are not nearly as scary when we see them coming and can develop an intelligent trading plan ahead of time.
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Markets go up and markets go down. That’s what they do and everyone knows it. Pullbacks to support happen all the time and shouldn’t surprise anyone. Yet they always do. By rule, they have to. If they didn’t, no one would sell and we wouldn’t dip in the first place. Every dip, no matter how trivial it looks after the fact, always felt real in the moment.
And now that we find ourselves at support, we have to ask ourselves if this is just another routine, buyable dip. As I already stated, every dip feels like it is about to get a lot bigger. That’s the only reason people sell the dip. Yet every dip in history ended in a bounce. And every time that bounce happened when people were the most pessimistic.
A funny thing happens when pessimism climaxes. That is the point when everyone who could be scared out of the market is finally scared out of the market. When the crowd finally gives up hope is the exact point when we run out of sellers, supply dries up, and prices bounce.
Are we at that point now? In a normal market, yes, we are moments away from the bounce. Maybe prices dip under 2,800 before supply dries up and prices bounce. Or maybe we already hit that capitulation point Monday afternoon. Either way, we are only talking about a handful of points either way. A dip buyer would be sitting on nice profits next week or the week after even if they got in a little too early or a little too late.
But that is only if this is a normal market and this is a routine pullback to support. That means the million dollar question is if this pullback is normal or abnormal.
The edge case occurs when things get wonky and the market goes into full-blown panic mode. Not only do the typical Chicken Littles run around claiming the sky is falling, but the far more confident dip buyers have second thoughts. That is what happened last year when prices tumbled more than 400 points in December.
Could that happen here? Sure. It can happen anywhere at any time and is one of the biggest risks to owning stocks. But as bad as it is, these panics are rare.
The line in the sand is 2,800. This support level stretches back to last fall’s big selloff and was major resistance for several months. Once prices finally break through resistance, it becomes support. And right now it is our lifeline.
Hold this level for a few days and all is good. The things about stock crashes is they are brutally quick. They happen before people have time to think and make rational trading decisions. This is the land of sell first and ask questions later. But if that is how this works and the market holds 2,800 support for several days, then we can be fairly certain the emotional selling died up. At least as far as last week’s headlines are concerned. Meaning it would take a new round of headlines to knock us lower.
But here is the thing about this latest round of trade war headlines, how much worse can they get? Both sides are already taxing so much they are quickly running out of new things to tax. Even if this doesn’t get solved, we are not far from the point where this cannot get any worse simply because both sides are running out of options to make it worse.
In my opinion, the headlines over the last seven days were the worst of what we will see. The market was blindsided by this escalation since it was anticipating a deal. But after the shock wears off and the market comes to terms with these headlines, most of the downside will have already been realized.
The thing to remember about falling stock prices is they are actually less risky to buy. That’s because a lot of the damage has already been realized. People are afraid of falling off of buildings, not falling off the ground. Yet paradoxically in the stock market, people are most comfortable on the top of tall buildings and most afraid when standing on the ground. Even though prices could fall a little further tomorrow and the day after, it is still far less risky to buy today’s dip than last week’s highs.
Most Likely Next Move: This is a buyable dip and if the market didn’t bottom Monday, it will happen Tuesday or Wednesday.
Trading Plan: People pray for a dip so they can get in at cheaper prices. But every time the market answers their prayers, they lose their nerve. Don’t lose your nerve.
If I’m Wrong: Prices tumble under 2,800 support and the reactive selling intensifies instead of dries up. Dipping under 2,800 is okay as long as we bounce back above not long after. But if we crash through support and finish the day at the lows, fear is taking over. But rather than fear the fall, take comfort in knowing even better bargains are coming.
What’s a good trade worth to you?
How about avoiding a loss?
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Tags: S&P 500 Nasdaq $SPY $SPX $QQQ $IWM
By Jani Ziedins | End of Day Analysis
Free After-Hours Analysis:
Thursday was another rocky session for the S&P 500. China countered Trump’s trade war rhetoric with some of their own. That threw cold water on global stocks overnight and the S&P 500 tumbled at the open, crashing through minor support at 2,850. While it looked like it was going to be another ugly day, Trump lifted hopes when he said a deal was still possible, sending a wave of relief through our markets and erasing a big chunk of those initial losses.
This is a headline-driven market and nothing else matters. Trump’s self-imposed deadline is Friday and no matter what happens, expect something dramatic. If Trump strikes a deal, stocks will surge in relief. If talks break down and Trump follows through with his punitive tariffs, markets will tumble. While that is stating the obvious, the most likely outcome is a combination of the above, a postponement and continued negotiations. That is half-full enough to keep the optimists in the stock market and half-empty enough to keep wary traders from buying the dip.
While the market’s next move hinges on what Trump and the Chinese do, those outcomes will have less impact over the medium- and long-term. Trump started his trade wars last year and has long said he is willing to tax everything imported from China at 25%. The market lived under these clouds for a long time and the risks have not prevented stocks from rallying to all-time highs. No doubt the same will happen this time too.
Even if Trump escalates the trade war for the umpteenth time, the market will react, get used to it, and then move on. Good news, bad news, it all gets priced in and then forgotten. Trump’s trade war is no different.
Up, down, or sideways, the next question is how to trade this. Personally, I don’t have any insight into whether Trump and the Chinese will strike a deal Friday or not. I don’t try to predict the headlines and I’m not going to start now. That said, how the market reacts to these headlines will give us something good to trade.
If a deal is reached: All is forgiven. The stock market is off to the races and we should stick with what has been working, which is buy-and-hold. The market will rally in relief as one more risk falls by the wayside.
If negotiations continue in a constructive way: The market will rally some as we avoid the worst case scenario. The market is buyable for anyone with a longer-term investment horizon. But as we’ve seen countless times over the last 12 months, there is lots of back and forth during these protracted negotiations. That means we should expect some dips and gyrations along the way as the inevitable snags drag us down. That means better prices might be ahead of us if someone wants to take advantage of a short-term move. As long as the market trades sideways and remains volatile, buy the dips and sell the rips.
And if talks fail: Let the market tumble. But rather than fear the collapse, get ready to buy the inevitable oversold condition. Emotional traders make poor decisions and that includes selling stocks at unreasonably low prices. Their pain becomes our gain. (You remembered to keep some cash handy to buy the dip right?)
Get a resolution and prices will quickly return to the highs. Protracted negotiations mean we could see further weakness. And a busted deal will lead to a sharp, but buyable selloff.
It is cliche, but only because it is true, “Plan your trade, and trade your plan.”
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Tags: S&P 500 Nasdaq $SPY $SPX $QQQ $IWM $AAPL $AMZN
By Jani Ziedins | End of Day Analysis
Free After-Hours Analysis:
It’s been a volatile few sessions for the S&P 500. It started last week when the Fed disappointed investors after telling us rate cuts were not being considered in response to slowing global growth. Then this weekend Trump shocked markets by announcing he was slapping additional tariffs on China.
So much for the easy glide higher. But we always knew the good times could not last and a bout of volatility was inevitable. We couldn’t predict the why and when, but the fact this happened shouldn’t surprise anyone.
The question everyone wants to be answered is if this is just a quick bout of indigestion. Or if this is the start of a larger pullback. For that, we need to dig deeper and look at the evidence.
Last week’s dip due to the Fed’s disappointment was fleeting and by Friday, prices had already returned to the highs. That decisive resilience told us those worries were not a serious threat to this market. But this week’s tumble following Trump’s trade war escalation is far less compelling.
Stock owners always run the risk of new and unexpected headlines. But this latest round of trade war rhetoric is not new and it is not unexpected. The trade war started more than a year ago and six months ago Trump threatened to tax everything coming out of China at 25%. But these headlines fell off the front pages during this year’s historic rebound and traders had largely forgotten about them…..until this week.
There are two reasons I don’t think this latest escalation is a big deal:
First, last year’s trade wars didn’t break the economy. Meaning a further escalation will probably also have a limited impact. These developments are most definitely not helpful, but they are not crippling either. We need to be wary of a tipping point where a little extra has an oversized effect, but assuming we avoid that, the next round of tariffs will have as limited of an impact as the previous rounds.
Second, it is widely known Trump judges his presidency by the performance of the stock market. As he shifts into reelection mode, he will be far more pragmatic and won’t take risks that damage his chances. While he might act tough, if this starts dragging down the stock market, expect him to back off pretty quickly.
No doubt lingering uncertainty will drive near-term volatility, but it will be far less dramatic than last year. Most of the people who fear trade war headlines bailed out last year and were replaced by confident dip buyers.
The next meaningful support level is 2,850 and the 50dma. That was a near-term bottom for Tuesday’s selling. Break that and far more durable support rests underneath us at 2,800. If that fails to hold, then we need to reevaluate all of our assumptions. But until then, this is just another buyable dip on our way higher. People always pray for a pullback, but when the market gods answer their prayers, they are too scared to buy the discounts.
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Tags: S&P 500 Nasdaq $SPY $SPX $QQQ $IWM
By Jani Ziedins | End of Day Analysis
Free After-Hours Update:
It’s been a dramatic two days for the S&P 500. Between Wednesday afternoon and Thursday morning, the index shed more than 50 points over a few short hours of trading. That volatility was a radical departure from the gentile glide higher trades have grown accustomed to.
Wednesday the Fed reiterated its policy of keeping interested rates steady, but it disappointed some investors when it said it was not considering rate reductions in response to slowing global and domestic growth. That disappointment triggered a two-day wave of reflexive selling that didn’t stop until we tumbled to 2,900 support.
Everyone loves a market that goes up nearly every day with dips measured in hours instead of days. These periods of calm spoil investors. But the inevitable arrival of volatility shouldn’t surprise anyone. And to be honest, Wednesday’s initial 0.75% decline and Thursday’s 0.21% followup loss barely qualify as volatility in conventional markets. This week’s moves only feel dramatic because of how calm things have been.
There are two ways to interpret this hiccup. Either it is an aberration that will vanish as quickly as it hit. Or this is the first jolt at the start of a bumpier ride.
Thursday morning started well enough with dip buyers rushing in and pushing prices above Wednesday’s lows, unfortunately, the lift was short-lived and prices quickly tumbled to new lows. The resulting selling picked up speed and didn’t stop until we exhausted supply almost exactly at 2,900 support.
The most encouraging development Thursday is prices closed well off the lows. The morning freefall bounced off near-term support and after that, traders were far more inclined to buy the weakness than continue selling it.
While this pullback is small, 2019 has been a year of small pullbacks. The thing about trends is they are far more likely to continue than reverse. (they continue countless times, but reverse only once) As long as we keep holding above 2,900 support, I will keep giving the benefit of doubt to this rally.
But if prices tumble under 2,900 Friday and finish near the day’s lows, that is a very bearish development and it means further selling is ahead of us. The most obvious next level of support is 2,850. After that, far more meaningful support is back at 2,800. While it would feel scary, either of these would be reasonable levels to test in a normal and routine pullback. Two steps forward, one step back.
What a person does in any of the above scenarios should already have been decided. Smart traders plan their exit before they even enter a trade. That’s when they decide if it will be a quick trade or a long-term investment. Whether they will sell into strength on the way up, or use a trailing stop to lock-in profits before the fall. There are many ways to trade, the important thing is to make those decisions during the clarity that comes before a position is put on. In the heat of battle, even the most experienced trader is vulnerable to making an impulsive decision if they don’t have a plan.
My personal preference is to sell early on the way up. That way I have cash on hand and am looking for a buying opportunity when everyone else is scared and worried about bigger losses. But that is what works for me. You need to decide what works for you. And no matter what you do, plan your trade and trade your plan.
I’d love to see this dip go further because that creates even more profit opportunity for swing-trade. Unfortunately, I don’t think I’ll be that lucky and this will bounce quickly like every other dip this year.
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What’s a good trade worth to you?
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Tags: S&P 500 Nasdaq $SPY $SPX $QQQ $IWM
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